# ADMS3530-Final-F07-Parts I &amp; II-Sol - Name _Section...

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Page 2 Part I 1. (Q. 3 in B) A perpetuity of \$5,000 annually beginning today offers a 15% annual interest rate. What is its present value? A) \$33,333.33 B) \$37,681.16 C) \$38,333.33 D) \$65,217.39 Solution PV = \$5,000 + (\$5,000/0.15) = \$5,000 + \$33,333.33 = \$38,333.33 2. (Q. 1 in B) What is the yield to maturity on a 10-year zero-coupon bond with a \$1,000 face value selling now at \$658? A) 4.2743% B) 5.1976% C) 6.5800% D) 51.9757% Solution %. 2743 . 4 1 658 \$ 000 , 1 \$ YTM 10 / 1 = = (You may also use your financial calculator). 3. (Q. 2 in B) A stock paying a \$5 dividend next year sells now for \$80 and has an expected rate of return of 14% annually. What will be the expected stock price one year from now? A) \$82.20 B) \$86.20 C) \$87.20 D) \$91.20 Solution . 20 . 86 \$ 75 \$ 20 . 11 \$ 80 \$ 80 \$ 5 \$ % 14 , return of rate Expected 1 1 1 0 0 1 1 = = + = + = P P P P P P D
Page 3 Use the following information to answer Questions 4–5. Snowing Inc. is considering the following three projects. Its opportunity cost of capital is 8%. Project Initial Investment Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 X -\$3,000 \$1,200 \$1,000 \$3,000 \$0 Y -\$1,000 \$0 \$1,200 \$0 \$1,000 Z -\$5,000 \$1,000 \$1,000 \$3,000 \$2,000 4. (Q. 5 in B) Given that Snowing Inc. uses the payback rule with a cutoff period of 2 years, which project(s) would the firm choose? A) Project X only

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## This note was uploaded on 04/11/2011 for the course ADMS 3530 taught by Professor Unknown during the Spring '09 term at York University.

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ADMS3530-Final-F07-Parts I &amp; II-Sol - Name _Section...

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